Economists react to the Bank of Canada's 25-bps rate cut: What's next for rates?

  3/12/2025 |   SHARE
Posted in Mortgage Interest Rates by Sheru Asnani | Back to Main Blog Page

The Bank of Canada cut its overnight rate by 25 basis points to 2.75%, its seventh straight cut. While expected, the move comes as the Bank tries to navigate economic uncertainty and the fallout from U.S. trade tensions.

The Bank of Canada‘s message in its statement was clear—it’s proceeding with caution. Policymakers warned that monetary policy can’t fully offset the effects of a trade war, and new tariffs are adding fresh risks to the outlook.

Now, economists from Canada’s major banks are weighing in on what this means for future rate cuts and how the BoC is balancing growth concerns with rising inflation pressures.

A necessary cut, but uncertainty looms

Most analysts agree that while the economy has performed better than expected in early 2025, trade-related uncertainty forced the BoC’s hand.

CIBC’s Avery Shenfeld described the rate cut as a “Band-Aid for a wound of unknown size.”

While the BoC acknowledged both upside and downside risks, he noted that the central bank placed greater weight on the downside risks to growth, which ultimately justified the rate cut. “If not for the trade threat, modest further rate cuts might still have been needed, but there would have been no urgency to deliver an easing today.”

Similarly, Oxford Economics pointed out that “elevated trade policy uncertainty” was the key reason behind the BoC’s move, adding that without the U.S.-Canada trade war now underway, the Bank may have paused given stronger-than-expected GDP, employment, and inflation data.

Will the BoC keep cutting? Experts are divided

Even with today’s cut, the Bank of Canada isn’t committing to more easing just yet, and some economists think a pause is likely at the next meeting.

TD Economics notes that while strong economic data could have justified holding rates steady today, the BoC isn’t taking any chances with the growing trade war risks.

Senior Economist James Orlando said the central bank is essentially buying insurance against a slowdown, given how much uncertainty tariffs are creating for businesses and consumers. TD still expects two more cuts by June, bringing the overnight rate to 2.25%, but warns that the Bank can’t go much lower without risking inflation problems.

Oxford Economics agrees, stating that “we can’t entirely rule out a couple more 25bps rate cuts to cushion against the negative impacts of ongoing uncertainty,” but that the BoC is unlikely to go below the lower bound of its neutral range (2.25%) unless trade tensions intensify significantly.

Meanwhile, RBC Economics emphasizes just how much uncertainty the BoC is dealing with, noting that the Bank removed explicit forward guidance from its statement. Chief Economist Frances Donald said that while a dovish bias remains in play, the BoC “is facing ‘more than usual uncertainty'” and is running multiple scenario analyses to gauge the impact of tariffs.

Governor Tiff Macklem reinforced that point in his press conference today, saying “monetary policy cannot offset the economic consequences of a protracted trade conflict.”

On the other hand, CIBC remains more dovish, forecasting two more 25-bps cuts in April and June, which would bring the policy rate to 2.25%—the potential floor for this rate cycle. However, Shenfeld cautions that if tariffs remain in place longer than expected, “a more protracted trade war could require even deeper cuts.”

BoC policy rate forecasts from the Big 6 banks

Trade war risks complicate rate path

The ongoing U.S.-Canada trade war is now the biggest factor influencing the Bank of Canada’s decisions. Experts note that tariffs are a double-edged sword—they slow the economy but also push prices higher, making it harder for the BoC to chart its next move.

BMO Economics noted that the BoC is trying to strike a balanced tone as it weighs the risk of weaker economic growth against the reality that tariffs will push inflation higher. The bank updated its official forecast and now expects three more quarter-point rate cuts at each of the next three meetings, which would bring the overnight rate to 2% by year-end.

“We strongly suspect that the weak growth impact will dominate and, while the Bank’s caution means it will proceed very slowly, the ultimate destination for rates is lower than the market now expects,” wrote the bank’s chief economist, Douglas Porter.

National Bank emphasized that inflation concerns remain a key constraint for the Bank of Canada, even as economic uncertainty grows. The firm noted that while the BoC is clearly worried about the negative growth impacts of a trade war, it also struck a more hawkish tone on inflation, citing rising short-term inflation expectations and businesses’ plans to pass on higher costs.

“It’s not just the inflation assessment that struck us as hawkish either,” the NBC economists noted. “The Bank dropped all references to excess economic slack/the output gap, instead saying Canada’s economy entered 2025 on solid footing on the back of robust GDP growth. While it’s true that the economy is in better shape
than most had thought, we still judge there to be excess supply.”

This tension between slowing growth and rising inflation risks was at the heart of Governor Tiff Macklem’s message during the post-announcement press conference where he confirmed the Bank did not “seriously consider” a larger 50-bps rate cut:

“A trade war, yes, it weakens growth, but it will also increase prices and inflation. We’ve got to be very careful to balance those two. So, against that background, we did not want to get ahead of ourselves.”

Source: Canadian Mortgage Trends

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